Journal of Regulatory Economics

, Volume 53, Issue 2, pp 152–173 | Cite as

Minimum safety standards with asymmetric safety costs

Original Article
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Abstract

We explore the welfare effect of minimum safety standards, focusing on the case where duopoly firms are asymmetric in that they have different safety effort costs. If duopoly firms are symmetric, they do not provide enough safety to be socially efficient, and so imposing minimum safety standards can resolve this problem. We show, however, that imposing minimum safety standards may reduce the social welfare when there is a large asymmetry in the safety effort costs. In the unregulated equilibrium, the high-cost firm’s safety effort is smaller than that of the low-cost firm, and the high-cost firm is more likely to provide a larger safety effort than is needed to have a socially efficient level with larger asymmetry in the safety effort costs. If safety standards raise the high-cost firm’s safety effort, both firms’ safety efforts may end up further away from the socially efficient level: the low-cost firm reduces its safety effort when the rival’s effort increases because safety efforts are strategic substitutes.

Keywords

Minimum safety standards Strategic substitutibility Cournot competition 

JEL Classification

L1 L5 

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Department of EconomicsHanyang University (ERICA)AnsanSouth Korea

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